Page 1 of 2 Work makes a comeback
By Julian Delasantellis
In the dark morning of September 11, 2001, Americans turned not to their proud
paratroopers, their pompous prelates, certainly not to their peripatetic
president, for solace and security, but to their pundits - who else was there,
for hours upon hours, delivering commercial-free wisdom from the box in
viewers' living rooms, seeking to explain the unexplainable?
A common refrain from the punditocracy was that, from that moment on, "nothing
would ever be the same again". In ways unimaginable at that instant, American
life would change, would be rendered unrecognizable from what was existent
before. In much the same fashion that Pearl Harbor changed the careless
youth of the summer of 1941 into the legionnaires of the great effort to
obliterate fascism that was World War II, so it would be here, albeit no one
really knew just how.
But as the TV networks returned to their regular broadcasts that Saturday, and
as the days past 9/11 turned into weeks and months, people started to be amazed
just how little actually was changing.
A brief and shallow economic recession was underway at the time of the attacks,
but a series of Federal Reserve interest rate cuts were already bringing that
to a close. Two weeks after the attacks, president George W Bush advised
Americans to keep shopping and not let their media-stoked terrors prevent them
from getting "down to Disney World in Florida. Take your families and enjoy
life, the way we want it to be enjoyed".
After a while, it seemed that, as long as you didn't wear a hijab or chador,
and as long as you hadn't previously joined the Army Reserves or National Guard
thinking that you would earn a few spare bucks for college spending one weekend
a month goofing off at the local armory, 9/11 hadn't change life for most
Americans at all.
But if terrorists flying jumbo jets into skyscrapers didn't really affect the
country, the current global financial crisis is affecting it, and will continue
to do so, in ways so staggering that we can now only glimpse the full extent of
its import. Al-Qaeda in 2001 didn't have weapons of mass destruction, but the
banking system did have what Warren Buffett in 2002 called "financial weapons
of mass destruction" - financial derivatives. They've been detonating for 18
months now in America, and not even the planners and now-deceased operatives of
the "planes operation" could ever have dreamed of such societal devastation.
Whatever you think happened at Roswell, New Mexico, or Area 51 in the American
southwest, there can be no doubt that in the years immediately following World
War II a fairly new life-form rarely if ever seen in world history had emerged
in America - the retired person.
Throughout human history, the question of what to do with a person who was too
old or infirm to work productively in service to the community was settled very
simply - you buried them, since they had probably been working, most likely in
small family farms or other small trading enterprises, right up to the day of
their death.
But it was the surplus value produced by the factories of the industrial
revolution that let the human race imagine a future other than being tethered
to a hammer or plough until their dying day. It was in 1889 that imperial
Germany instituted Otto von Bismarck's groundbreaking system of government
pension payments for the few who lived to be 65 years old; in 1935, US
president Franklin D Roosevelt used that same Bismarck-derived retirement age
to determine when Americans could start collecting old-age assistance under the
Social Security Act.
But, unlike in Europe, US Social Security was never intended to fund the
entirety of a person's retirement. Some other private savings or retirement
plan would have to be initiated during a person's worklife.
Along with the government's old-age income support program, the increasing
power of big labor, plus the factor of big industry wanting an incentive to
keep skilled labor during the booming war and post-war period, led to the
development of numerous private pension systems. Much like in the old movies,
this would be the check that the retiree would receive along with the gold
watch at the retirement party. From then on until the end of his or his
spouse's life, he would receive that same check, in that same amount (with
occasional adjustments for inflation ) every month; these were known as the
"defined benefit ", after what the employee could count on receiving - benefit
plans.
It was then, in the salad days of America's post-war economic dominance, that a
wholly new cultural avatar appeared on the land - the well-off retiree. Prior
to Social Security, the elderly had been America's poorest age cohort, living
in poverty or starvation, or, as seen in 1985's look at the trials of old age
during the Great Depression, The Trip to Bountiful, forced to endure a
difficult existence with less-than-welcoming children.
Soon after the passage of the Medicare old-age medical assistance bill in 1965,
there began a continuing sharp decline in elderly poverty, a decline fairly
unique across the nation's age cohorts. Whole regions of the country, such as
Florida and the Southwest, began to be developed and populated by retirees from
the colder US northeast now with the means and other wherewithal to live
independently. Cultural commentators began to speak of a new "Third Age" of
American life, retirement, that, what with advances in gerontology and income
support, could be perhaps as extended and fulfilling as the human race's
traditional two phases of existence, childhood and career.
But with all those 40 million elderly Americans seemingly living high off the
hog by 1970, you had to know that there would be those looking to divert some
of this group's riches in their direction. As so often happens with the
enforcement of the laws of unintended consequence, the process by which the
elderly of the near future will be laid low and destitute started with an
effort to help the elderly of the past.
Not all went swimmingly with the defined benefit pension system. Some companies
were just too slothful or incompetent to run their plans properly; others just
couldn't say no when the friends of Tony Soprano came knocking and making them
an offer they couldn't refuse - namely, to not get their legs broken as long as
the gumbas were allowed access to the pension money. The US Employee Retirement
and Income Security Act (ERISA) was enacted into law in 1974, providing
standardized rules and obligations companies must follow in order to manage
most effectively their pension obligations for the benefit of their retirees.
But it was a little-noticed feature of ERISA that would turn out to have a huge
effect on how retirements were financed. Americans were then authorized to
establish and employ a tax advantaged investment vehicle called the Individual
Retirement Account (IRA). Here they could set away funds that they, not whoever
was managing their company pension, could oversee and manage in just about any
way they pleased. Up to a certain limit, monies put into an IRA were deducted
from a worker's gross taxable income, providing a very significant tax cut in
those high marginal tax-rate days, and any capital gains accruing to the
investments in the IRA were not subject to taxation until the worker's
retirement, when he would presumably be paying taxes at a much lower rate than
during his working life.
By the late 1970s, middle-aged Americans were swooning over IRAs the same way
that their children were over Tony Manero's quiana shirt in Saturday
Night Fever. They enjoyed the tax breaks of the IRA, and the chance to
put their retirements in their own hands appealed to the country's independent,
cowboy spirit. Very few saw or realized what was actually happening here - that
their employers, the corporations, were being taken off the hook to provide for
employees' retirement.
It was in 1978 that Congress amended the rules of the Internal Revenue Service
(IRS) by adding section 401(k), taking the self-directed aspect of IRA
investing a big step forward. In this, companies were authorized to offer their
employees (the self employed could do it on their own) an investment vehicle
that came to be known as the 401(k). Here, employees could invest in a defined
set of investment choices specified by their company, with the wages committed
to the fund once again not subject to immediate taxation.
What really differentiated the 401(k) from the IRA was that, at its option, the
company could match all or a part of the employee's contribution with a
contribution, called a "match", of their own. This was the contrast to the
standard, defined benefit pension plan that was still fairly common at the
time; employers contributing to 401(k) and other type retirement plans were the
cutting edge of America's brave new world of retirement security, called
"defined contribution" benefit plans.
Employers, both private and public, loved 401(k) defined contribution plans -
they were much cheaper to administer than defined benefit plans. The latter
required the continuing employment by the company of high-priced investment
managers in order to ensure that the guaranteed benefit promised to the workers
was earned - in contrast, all that 401(k) defined benefit plans required was
the company doing an electronic funds transfer into the employee's plan. In
addition, it came to be accepted that many companies were not even offering any
type of corporate financial match to the employee's funds; just having set up a
401(k) was seen to be a commitment sufficient to the workers' retirement
security.
In 1996, economist Leslie E Papke of Michigan State University investigated the
issue of whether defined contribution 401(k) plans were replacing, not
supplanting, more traditional defined benefit pension plans.
"I find that 401(k) and other DC [defined contribution] plans are substituting
for terminated DB [defined benefit] plans and that offering a DC plan of any
type increases the probability of a DB termination. Thus, it appears that, at
the sponsor level, many of the new 401(k) plans may not be avenues for net
saving but are replacements for the more traditional pension forms. Using
several specifications, I estimate that a sponsor that starts with no 401(k) or
other DC plan and adds a 401(k) is predicted to reduce the number of DB plans
offered by at least 0.3. That is, the estimates imply that one sponsor
terminates a DB plan for about every three sponsors that offer one new 401(k)
plan."
What did employees think of this phenomenon? It is important to remember that
generous defined benefit pension plans were very much a product of the era of
powerful US industrial and commercial labor unions, power that started to erode
with the economic dislocations of the 1970s. President Ronald Reagan's firing
of the PATCO air traffic controller union workers in 1981 sent a clear signal
to both labor and management as to where the US Government's sympathies lay -
sympathies that only slowly and haltingly moved back a bit towards labor during
president Bill Clinton's uneasy cohabitation with the pro-corporate Republican
conservatives who took over Congress in 1994.
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